International Trade Finance

1. MACRO PERSPECTIVE
CHAPTER 1.1
Smith theory (1723-90) contribution is known as the theory of absolute advantage.
Theory of absolute advantage means producer needs to produce the goods at low cost and
than export
Example if any foreign country is trying to produce goods at low cost than domestic country
it is better to import from them.
Vice versa situation also plays
And also mutual exchange of goods between the countries looks good
David Ricardo (1772-1823) given the idea of comparative advantage
In case of comparative advantage we need to look into productiveness of industries and
productiveness of countries
Productive ness means labour which are involved in producing goods
Hechscherohlin theory looks after the production factors like land labour capital and natural
resources
It will export abundant used factors and import scarce resources
Factor price equalisation theory states that the most abundant resource price may rise and
scare may fall so there is need of equalisation
Factor price equalisation eliminates comparative advantage based on factor price

CHAPTER 1.2
WTO came into being on 1995.
It has come into existence after GAAT General Agreement on Tariffs and Trade (GAAT)
It helps producers of good and services, importer, exporters to do their business
Uruguay rounds of talks made for the formation of WTO
Totally 164 countries present in WTO as of July 29th 2016
In 2000 agriculture and services discussions started in Doha round of talks
Fourth ministerial conference held in Doha Qatar in november20001
In the fourth conference non-agricultural tariff antidumping details are discussed
World bank identified 32 major regional trade blocks
Trade block means group of countries that have established preferential trade agreements
among member countries

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PTA stands for preferential trade agreements
Most commonly used PTA is Free Trade agreement
Free Trade Agreement means reducing or removing the tariff and non-tariff barrier between
member nations but not with the non-member nations
A step forward for the FTA is the Custom Union (CU) where not only removing trade barrier
with the member nations but also maintaining the identical trade with non-members.
Regional and Bi lateral trade agreements can cause trade diversion and trade distortions
List of RTB:
ASEAN: It was founded in August 8th 1967
Meeting will be held annually
APEC: Asia Pacific Economic Cooperation
It has 21 members called Member Economies
EAEC: East Asia Economic Caucus
It is known as Asian Plus Three
ASEM: Asia Europe Meeting
It is established in 1996
CHOGM: Common Wealth Heads of Government Meetings
EU: European Union strong international trade
There are five EU institutions namely European Parliament, Council of EU, E Commission,
Court of Justice, Court of Auditors
NAFTA: North America Free Trade Agreement
CIS: Common Wealth of Independent States
COMESA: Common Market for Eastern and Southern Africa
SAARC: South Asian Association of Regional Cooperation established on Dec 8th 1985
ITR: Intellectual Property rights
It will be held annually.
MERCOSUR: It is a tariff union of South American Countries
It is the fastest growing trading blocks
G-15 group established in 1989
G7 economic power group became G8 after adding Russia
G77 is the third largest world coalition in United Nations

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D8 is the group of developing eight countries
IOR-ARC (Indian Ocean Rim Association for Regional Cooperation) established in
Mauritius March 1995

CHAPTER 1.3
ICC: International Chamber of Commerce founded in 1919
Aim of it is to promote trade and investment open market for goods and services and free
flow of capital
Organisation international secretariat is in Paris
International court of Arbitration established in 1923
ICC uses UCP 600 rules for documentary credit problems faced by bank in solving disputes
UCP was first introduced in 1933
UCP 600 has come into existence in July 2007
World Chamber Congress held in Korea and named IBCC as World chamber federation

2. TRADE TRANSACTIONS
Chapter 2.1:
Trade transactions are generally divided into three categories namely
Movement of goods, Movement of Documents, Movement of Funds.
Banks play an important role in Movement of Documents and funds but Movement of goods
is dependent on persons involved in between
When it comes to international trade there will be risks they are classified as country risk,
foreign exchange risk, and commercial risk
Under Country Risk factor that are effecting the trade transactions are Political Environment,
Economic Environment, Legal Infrastructure, Foreign Exchange Restrictions.
Foreign exchange risk comes when there is uncertainty in the value of future payments in that
currency
Under Commercial Risk the factors that are effecting are Reliability of information which
means as the parties are staying in different locations so financial status information of each
parties will be limited
Trade dispute: Domestic Trade dispute is different from the International Trade disputes so in
solving the issues legal proceedings will be expensive
INCOTERMS are generally used in both International trade and Domestic Trade

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Generally for exporting and importing of the goods we need to follow some set of rules
INCOTERMS which was published by International Chamber of Commerce
INCOTERMS-→ International Commercial Terms
Now 8th version of INCOTERMS we are using.
This is very important point International Contract terms are reduced from 13 to 11
Some of the advantages of using this Standardized terms is that it defines responsibility,
define delivery, shorten the contract of sale, it reduces the language barriers internationally
Remember this INCOTERMS are not contract oriented they are just rules, they are not the
means of transfer of property and do not provide relief for any unforeseen events.
The parties will need to take insurance in case any damage during the transit

INCOTERMS are divided into two categories based on method of delivery

There are seven rules where four rules are looking after the transportation by means of the
water and verifying the condition of good during loading
Group 1 : The below are the INCOTERMS that applied to any type of transport
EXW: Ex Works (Ex-factory Ex-Go down): Here the risk of the exporter is very less and
foreign buyer need to come to the premises of exporter to collect the goods
FCA : Free Carrier : This comes into picture under multimodal transport.
CPT: Carriage Paid to: The seller is responsible for carriage of goods to the destination
CIP ( Freight Carriage and Insurance Paid) : Here the seller has to pay the insurance against
the risk or loss during the carriage of goods
DAP: Delivery at Place : The seller pays for transport to specified destination from there the
buyer need to take care off
DAT : Delivery at Terminal : The seller pays for transport to specified Terminal from there
the buyer need to take care off
DDP : Delivery Duty Paid: Here the entire activities involved till the destination of goods
should be born by the Seller. The activities may be insurance, documents warrant and other
kinds of risk

Group 2:
FAS: Free alongside ship: This price includes all cost at the port of export and does not
include ocean freight charges and marine insurance charges. Once the goods are placed at the
importer side rest of the risks should be borne by the buyer
FOB: Free On Board: It include Ex Works Price, packing charges, and transportation
charges.

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In this type of term the bill of lading should contain the term shipped on board.
CFR (Cost & Freight): It includes FOB plus freight charges Risk is transferred to the buyer
at the port of shipment itself.
CIF (Cost Insurance Freight): It includes FOB plus ocean freight and marine insurance and
should be taken by the exporter itself
FOB and CIF are mostly used for sea transport
Ex-Works CFR and DDP are used where the custom harmonisation is in place
In India there is a special form introduced by RBI related to remittances against exports of
software and related IT service by name SOFTEX
Bilateral trade means instead of payment of money the trade will be done on the basis of
exchange of goods and services
Merchant trading means buying the good from one country by another country and suppling
those goods to an another country so between the three countries the trade exist
Condition for merchant trading: good should not enter domestic tariff area and good should
not undergo transformation
Goods that are to be exported should follow the foreign trade policy on the date of shipment
Under merchant trading the transaction should be routed to same bank
Merchant trade transaction should be completed in 9 months
Outlay of foreign exchange should not be more than 4 months
Any import leg beyond 200000 per transaction should be made against bank guarantee
Any deviation in the transaction should be reported to RBI
Any merchant trader whose outstanding is 5% than he should be shortlisted
High seal sale: It means the ownership is transferred to other party when the goods are still in
transit

Chapter 2.2:
The three way to do international trade are
Clean Payments: All trading documents, title documents are under the control of trading
parties
They are two types of clean Payments
Advance payment: Exporter send the goods only after the receiving the payment form the
importer

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Open Account:
Importer pays to exporter only after the receiving the good from exporter.
Bills for Collection:
The official documents which will be given by exporter to banks and give instruction to
release the documents to the importer
Document against Payment: Document will be released only after payment to exporter.
Documents against Acceptance: only against the acceptance of draft documents are released
Documentary Letter of Credit: It is the underwriting given by the Importer bank on behalf of
the customer promising the payment to the exporter
Revocable LC: Can be cancelled without the consent of exporter
Irrevocable LC: Both parties should accept for cancellation
If the payment is made at the time of presentation of documents it is called sight LC
If the payment is made at future date from the date of presentation of documents it is called as
Term LC
Confirming LC: The bank under this will give confirmation to issuing bank that payment will
reach the exporter. The confirming bank can be as per the choice of Exporter. Like if he has
bank which is well known to him

Chapter 2.3:
Clean payments are classified in two types
Payment in advance
Open account
Advantages of open account to importer: no risk, delays use of company cash resources
Advantages of Advance payment to importer: low cost
Risk Spectrum will summarize the risk that is associated with the payment methods in
relation to the exporter and importer
No risk will be assumed in case of advance payment to exporter

Chapter 2.4:
Documentary letter of credit means exporter gives the instructions to the bank to release the
documents to the importer
Documentary letter of credit is also called as collection against bills
In the case of Documentary collection the exporter is Drawer and Importer is Drawee
The exporter Bank and remitting bank need not be the same
Collecting bank and presenting bank need not be the same

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There are different parties involved namely
Exporter: He will submit the documents to bank in that details of payment of importer will
be present (When and How)
Exporter Bank is called as Remitting Bank which it send the documents to Buyers Country
bank and give the instructions to pay for the exporter when payment is received from the
collecting bank
Buyer duty is to pay the bill and take the documents
Importer Bank is the collecting bank and act as an agent for remitting bank
It release the documents to importer when received the payment.
If suppose importer did not pay than the collecting bank will provide the storage and
insurance for the goods till the due is paid
In case of dishonour than the collecting bank will protest the bill
Settlement of Bills will be done in two ways D/P or D/A
D/P Documents against payment: It is also called as Cash against Documents/ Cash on
Delivery
The importer should pay usually within 3 days from the date of presentation of documents
In the above case if the importer does not pay exporter can go for court.
CASE OF NEED is something who can help or do arrangements in the importer country if
the importer do not pay the bill
D/A Documents against Acceptance: There will be an small agreement between two parties
where the importer is required to accept the bill. In this case importer will pay on some date
in future
Generally exporter provide credit to importer this credit is called as Usance
Term here implies Multiples of 30 days
Risk here is exporter loses the control on the goods
Few risk for the exporter here is importer may be bankruptcy, may say some good are
damaged, may cheat the importer
Usance Bill means importer accepts the bill payable at a specific future date but does not
receive the documents until the payment is done

Chapter 2.5:
LC is a kind of arrangement where bank play in order to pay the third party against the
presentation of documents
Banks only deals with documents not with the goods
There are three parties associated with the LC namely Applicant, Issuing Bank, Beneficiary

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In case where the beneficiary transfer the credit to the other person than he is referred as first
or Original Beneficiary
The advising bank will give the information to the beneficiary the LC is opened in his favour
Confirming bank comes to picture only when the exporter is not satisfied with the
undertaking of the only issuing bank.
Negotiating bank is the one with whom the documents may be negotiated
Bank which accepts the reimbursement claim in settlement of negotiation put by the
negotiating bank is called as Reimbursement Bank
If the credit is transferred from the First beneficiary than the second Beneficiary comes up.
SWIFT:
It is a worldwide interbank financial telecommunications
It is two fold
It allows the customers to exchange the information reliably and securely
It helps in settling the transactions fast and with low cost and reducing operational risk
It head Quarters is in Brussels, Belgium
It transport the messages the information from two financial institutions and maintain the
integrity and confidentiality
Swift messages are categorised by numbers called MT numbers
MT 800 deals with traveller’s cheque
MT 300 deals with foreign exchange deals
Swift India services started in India on 7th march 2014
In case of LC the following are the documents that are required namely Bill of Exchange,
Commercial Invoice, Transportation Document, Insurance Document, Inspection Certificate,
and Certificate of Origin
The documents should be prepared in the language of LC
Modifications in the LC can be done but with the acceptance of the both parties
Confirmed LC is costlier to the parties concerned since there would be charges of confirming
bank
Back to Back LC is also called as Countervailing Credit
On one LC if another LC is drawn than it is termed as Back To Back LC
The original Credit is referred to as Overriding Credit or Principal Credit
Back to Back LC is not preferable by the banks because the person who open the Back to
Back LC may not produce the same documents at the other end

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Transferable LC means transfer of Ownership of documents is shifted to second Beneficiary
from first beneficiary. Here first beneficiary will become intermediary
Import Operations will takes place when the resident in India is importing goods into India
There are two types of charges when a Importer LC is opened
Opening charges: This include LC opening charges, fee charged by the LC opening Bank
during the commitment period is referred to as Commitment fees
Usance period may vary from 7 days to 90/180 days
The fees will be charged by the bank during usance period is called as Usance Charges
After the Retirement of LC the retirement charges will be collected from the beneficiary
The following are the risk while opening import LC
a) The financial status of importer
b) The goods
c) The status of the exporter
d) Country risk
e) Foreign exchange risk

The LC is opened by the person staying abroad on the name of person in India is called as
Export LC
Under the Scheme of ECGC both Commercial and Political Risk are covered
The reimbursement bank always earn the commission per transaction for the balance kept
with the reimbursement bank by the issuing bank
It will look after the payment details not the documentation
Roles and responsibilities of Reimbursement are governed by ICC uniform rules for
Reimbursement
Trade Control in India will look after the physical movement of goods and make sure that are
doing as per the Foreign Trade policy guidelines
ICC Publications name ISBP International Standard Banking Practice for examining the
documents under Documentary LC
First ISBP is in 2002
Now 2013 publication is running and it covers Packing list, weigh list, Beneficiary
Certificate, Non-negotiable Sea Waybill, Inspection, health etc.
FEDAI Self-Regulated Organisation
It authorise the bank to do foreign transactions

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Chapter 2.6:
Generally there are few documents which we need to take while doing LC
Air Waybill: This is the receipt given from the Airline Company. It is not any Document and
also not considered as Negotiable Document.
Bill of Lading: Transport by means of Ship. It is negotiable documents as goods will be
handover to the destination person only after the producing the goods
2 or 3 copies of bill of lading will be taken when one is presented the others will be
considered as void
There are some parties in Bill Of lading:
Shipper, Consignee, Notify Party, Carrier
Certificate of Origin: shows that goods are originated in a particular country
Combined Transport Document: This List contain place of receipt place of delivery and
different modes of transport.
Another name of this transport is multimodal transport document, inter modal transport
document or combined transport bill of lading
The liability will lies from the starting and end place of delivery
Commercial invoice: It is statement of goods shipped and also includes statement of payment
due
Draft: This is the demand for payment issued by the exporter to the importer
They are issued in the set of two: first of exchange/second of exchange OR Singly(Sola bill
of exchange)
Insured amount must be the same currency as the credit and usually for the bill amount plus
10 percent
As per the UCPDC guidelines if the LC does not stipulate the value insurance value that
should be specified is 110 percent of CIF value
Packing List/ Specification means packing material that is used for packing and also labelling
is also done after packing
Exporter need to submit the inspection certificate

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 International Trade Finance

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